i House Insurance 2013: January 2015

Thursday, January 29, 2015

SNL: Top 5 Banks Own 44% of Industry

Big banks are getting bigger.

A new report released Thursday by data provider SNL Financial found that the country's five largest banks own 44% of the industry's total assets. That continues a march higher that has been going on since at least 1990, when 9.67% of the industry's total assets came from the top five banks.

"Total assets concentrated in the five largest banking institutions have steadily increased since 1990, reaching a peak in the third quarter of this year," said SNL analyst Marshall Schraibman in his report.

J.P. Morgan Chase(JPM), Bank of America(BAC), Citibank, Wells Fargo(WFC) and U.S. Bank held $6.46 trillion in assets as of the third quarter of 2013, SNL found. The rest of the industry, comprised of thousands of midsize, regional and smaller players, held a total of $8.15 trillion.

In 1990, the five largest financial institutions held $457.92 billion, or 9.67% of the industry's total assets, according to the research firm.
The top five banks in 1990 were predecessors to the top five institutions today.

Mr. Schraibman said varying narratives have developed to explain the concentration of assets. Some argue that new regulatory burdens make banking overly costly for smaller institutions. Others say the history of consolidation that created "too big to fail" institutions are still impacting the banking sector today.

While some observers had predicted a wave of M&A among smaller institutions to deal with the increased regulatory costs, Mr. Schraibman said those deals have failed to "move the needle" in terms of asset concentration. Mergers among big banks are largely a thing of the past, due to heightened regulatory concerns after the financial crisis.

One other trend noted by Mr. Schraibman was that the median return on average assets for the top five institutions today is nearly 50% higher than the overall industry. That's in sharp contrast to the return on average assets in 1990, where the largest institutions trailed the sector by 0.33 percentage points.

Mid-Afternoon Market Update: Textron Rises as Markets Rise Across the Board

Toward the end of trading Friday, the Dow traded up 0.64 percent to 16,282.95 while the NASDAQ surged 1.31 percent to 4,111.77. The S&P also rose, gaining 0.76 percent to 1,823.90.

Top Headline
BlackBerry (NASDAQ: BBRY) swung to a loss in the third quarter.

BlackBerry posted a quarterly loss of $4.4 billion, or $8.37 per share, versus a year-ago profit of $9 million, or $0.02 per share. Its adjusted loss came in at $0.67 per share.

Its revenue dropped to $1.2 billion from $2.7 billion. However, analysts were estimating a loss of $0.44 per share on revenue of $1.59 billion. BlackBerry also entered into a five-year strategic partnership with Foxconn to develop and manufacture phones.

Equities Trading UP
Red Hat (NYSE: RHT) shot up 14.58 percent to $56.25 as the company reported better-than-expected third-quarter results.

Shares of Jazz Pharmaceuticals Public Limited Company (NASDAQ: JAZZ) got a boost, shooting up 7.77 percent to $123.65 after the company announced its plans to buy Gentium SpA (NASDAQ: GENT) for around $1 billion.

Textron (NYSE: TXT) was also up, gaining 13.05 percent to $36.82 after news broke that the company was nearing a $1.4 billion deal with Beachcraft.

Equities Trading DOWN
Shares of TIBCO Software (NASDAQ: TIBX) were down 11.83 percent to $21.58 on Q4 results. Analysts at UBS downgraded the stock from Buy to Neutral.

CarMax (NYSE: KMX) shares tumbled 10.23 percent to $47.62 after the company reported a weaker-than-expected Q3 profit.

Swift Transportation (NYSE: SWFT) was also down, falling 6.83 percent to $21.95 after the company released some poor guidance after the close on Thursday.

Commodities
In commodity news, oil traded up 0.09 percent to $99.13, while gold traded up 1.15 percent to $1,202.70.

Silver traded up 0.77 percent Friday to $19.41, while copper rose 0.39 percent to $3.31.

Eurozone
European shares were higher today. The Spanish Ibex Index gained 0.23 percent, while Italy's FTSE MIB Index climbed 0.77 percent. Meanwhile, the German DAX surged 0.74 percent and the French CAC 40 jumped 0.41 percent while U.K. shares gained 0.39 percent.

Economics
The U.S. economy expanded at an annual pace of 4.1% in the third quarter, versus a prior reading of a 3.6% growth. However, economists were expecting a growth of 3.6%.

The Kansas City Fed manufacturing index declined to -3.00 in December, versus a prior reading of 7.00. However, economists were expecting a reading of 6.00.

Posted-In: Earnings News Guidance Eurozone Futures Commodities Forex Global Econ #s Economics Hot Intraday Update Markets Movers Tech

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Wednesday, January 28, 2015

Time Is Running Out on Energy-Efficient Home Improvement Tax Credits

Can I still get a tax credit for home improvements?

Public Storage Posts Higher Net Income; Beats Earnings Estimates; Raises Dividend (PSA)

Public Storage (PSA) announced its third quarter earnings after the bell on Thursday, posting an increase in net income and revenues.

PSA Earnings in Brief

-Public Storage announced total quarterly revenues of $419 million, which were up from last year’s $397 million, but below the average analyst estimate of $464.58 million.
-The company’s net income came in at $231.4 million, or $1.34 per share, which was up from last year’s Q3 net income of $202.5 million, or $1.18 per share.
-PSA’s core FFO per share was up from last year’s $1.76 to $1.92 for the most recent quarter; this beat analysts’ estimates of $1.89.

Dividend Raise

Public Storage announced that its board has approved to raise its dividend 12% to $1.40 per common share. This is a 15 cent raise from the company’s previous quarterly payout of $1.25 and brings the annualized payout to $5.60. The new dividend is payable on December 30 to all shareholders on record as of December 13.

Share Performance

PSA stock was down 66 cents, or 0.39%, on the day, but was up steeply in after-hours trading. YTD, the company’s stock is up 14.74%.

Monday, January 26, 2015

Advisers back SEC initiative on exams

securities and exchange commission, examinations, advisers, compliance, regulation

A plan by the Securities and Exchange Commission to target those advisers who have never undergone compliance examination next year is drawing support from advisers, consultants and trade associations.

On Thursday in New York, SEC inspections chief Andrew Bowden told a meeting of the Regulatory Compliance Association Inc. that the regulator plans to make the approximately 4,400 advisers who have never faced an SEC exam a priority to a formal review in 2014. Of that number, Mr. Bowden said the agency will zero in on about half, 2,180, that have been registered for more than three years and are domiciled in the U.S.

“We favor the inspections,” said Martin Hopkins, president of Hopkins Investment Management, whose firm has undergone an SEC exam. “It holds you to a standard. It shows you how you could be doing things better. All of that is in the best interest of the investing public.”

Leighton Roper Jr., owner of Net Worth Advisory Services, is registered in Virginia and said that state securities regulators visit him every couple of years. His firm is too small to fall under the SEC's regulatory umbrella, but he's in favor of stepped up SEC exams.

“I don't mean to be vindictive about it, but if there's a regulatory responsibility, it should be performed,” Mr. Roper said. The SEC's examination record “means there are an awful lot of advisers who have yet to be challenged on the way they do business.”

An investment adviser trade association in Washington also welcomes the agency's focus on unexamined advisers.

“We have encouraged [the SEC], in very strong terms, to address this population of advisers,” said David Tittsworth, executive director of the Investment Adviser Association. “It's not helpful to us as a profession [for advisers to go without review]. We want the SEC to have a more robust and thorough examination program.”

Flying under the SEC's radar increases the chances that advisers have compliance weaknesses, according to Amy Lynch, president of FrontLine Compliance LLC.

“I really hope this is a wake-up call to the industry,” Ms. Lynch said. “There are way too many firms out there who think their compliance programs are just fine because they've never been examined. They've been playing a game of Russian roulette.”

The SEC is likely to zero in on areas such as custody, financial records, marketing, and trading and trade allocations, Ms. Lynch said.

The SEC has indicated that it has the resources to conduct annual examinations of only about 8% of the 11,000 registered advisers it oversees. It doesn't look as if it will get the budget increase it is requesting this year to add 250 investment adviser inspectors to its staff.

“They are now trying to find new ways to target their examination program so that they can get a more diverse base of registrants examined,” Ms. Lynch ! said.

Some of the reaction to Mr. Bowden's remarks was skeptical.

“Next year I'm going to lose 40 pounds, too,” said Brian S. Hamburger, president and chief executive officer of MarketCounsel, a regulatory consulting firm. “It's aspirational.”

Mr. Hamburger said it is an open question whether Mr. Bowden's office has the proper management and resources to fulfill its ambition, given that the office also devotes considerable resources to examining broker-dealers, who are also regulated by the Financial Industry Regulatory Authority Inc.

Trevor Hunnicutt contributed to this story.

Sunday, January 25, 2015

Japan's Growth Story Hits a Crossroads

Japan's crushed investor expectations in 2013, and the Nikkei's (NIKKEIINDICES: ^NI225 ) had a banner year. The country's leading stock index has surged more than 38% year to date, and added another 2.6% to its yearly haul over the past week.

Signs are looking up in the world's third-largest economy, as prime minister Shinzo Abe and the Bank of Japan try to get the economy on pace and out of its multi-decade slump of years past. But it won't be so easy for Japan to just turn on the economic gas: Obstacles stand in the country's way, from Tokyo's plans and the country's debt, to global movements out of Japan's control. Should investors have confidence that this surging market can keep up its momentum?

Challenges ahead
The Bank of Japan's feeling confident. Abe's long touted his 2% inflation target for an economy that's struggled with deflation for years, and the BoJ said this week that the country's on pace to hit that mark down the road.

Even with that endorsement, however, deflation fears are still high. Much of that is due to Tokyo's proposed sales tax hike this year in order to counter the country's runaway public debt. While making some sort of revenue-generating move looks necessary for Japan's government to rein in its debt, increasing taxes on consumers could hit spending just when Tokyo's hopeful that consumers will pick up the pace. It's a classic case of biting the bullet in the short term to mitigate long-term risks, normally a sound strategy -- but in Japan's case, Tokyo has to make sure that the short-term impact of the tax, if it passes, won't cripple the economy's turnaround.

Worse for Japan, however, are fortunes entirely out of its hands. The slowdown in emerging markets, and other top economies, has worried economists and investors. One BoJ board member called lackluster global growth, particularly in large markets such as the U.S., a critical threat toward the company's exports.

Leading exporters have taken advantage of the yen's fall this year, and a drying-up export market would be a big blow to companies counting on the weak currency to shore up their bottom lines. Unfortunately for investors, the Nikkei's bounced around wildly on the yen's swing, and more volatility's likely to come. It's a trend investors can't plan for. The best case is to pick out Japan's best stocks and companies and to wait out the market's fickle moves, as Japan works its way back to sustainable growth.

Unfortunately, the yen's impact on stocks has blurred the lines on investments. Look no further than down-on-its-luck camera maker Nikon (NASDAQOTH: NINOY ) . Nikon's shares gained more than 8% over the past week due to the yen's weakness, as the company rakes in more than a quarter of its sales in Europe. Still, the stock's lost more than 43% year to date.

Nikon's anything but a comeback story. This company's in a declining business, as rising tech firms knock out older camera makers, and Nikon already saw its first-quarter profits fall 72% year over year. Don't let Nikon's rise this week affect your investing thesis; like some of Japan's weaker firms, it's hitting a temporary bump because of the yen's volatility on what's otherwise been a downward spiral all year.

Nikon's story is similar to what's plaguing its Japanese rival, Canon (NYSE: CAJ ) . Canon's stock has nosedived by 20% year to date, but the stock's recovered nearly 3% over the past month. Don't let appearances fool you: The company slashed its full-year sales and profit forecasts back in July, as the worldwide camera market has slumped, and as smartphones continue to take over this aging niche. Canon's route back to respectability looks like a treacherous climb.

The weak yen is a boon for truly great companies in Japan that hold strong positions in their industries, such as Toyota. But for Canon, Nikon, and other firms struggling with waning outlooks, the currency's fluctuations will only hold off their falls in the short term. As always, it's critically important that you do your homework on a company before investing in Japan's surging stocks, and think for the long term, not for what the yen's fall in 2013 can get you.

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Not Everything That Shines Is Gold

After reaching a three-month high, gold prices fell once again following the announcement of a possible strike on Syria. Considering investors are already skeptical when it comes to gold mining firms, due to their cyclical nature, Yamana Gold Inc. (AUY) and Eldorado Gold Corp (EGO) have a lot to prove.

A Potential Buy

Yamana Gold, founded in 2003, operates gold and silver mines in Brazil, Argentina, Chile and Mexico. The firm also produces copper at its Chapada mine, yet gold is its strong suit, at around 80% of total production. Although Yamana has grown primarily by acquisitions, the strategy has shifted in recent years towards generating more internal growth. It comes as no surprise that Donald Smith & Co. and Ray Dalio from Bridgewater Associates have decided to increase their stake in the company by 70.53% and 380.62%, respectively.

Yamana's attractive portfolio of silver and gold mines in the Americas is situated at the low end of the industry cost curve, giving the firm an edge over competitors. In addition, the production of copper makes the firm less vulnerable to sudden drops in gold prices. Looking forward, the firm has several advanced projects in the pipeline, with Pilar, C1 Santa Luz, and Ernesto mines going live by the end of 2013. The acquisition of Cerro Morro in Argentina in June 2012, an exceptional asset with ultrahigh grades and shallow depth gold-silver deposits, will serve as further stimulus. The company´s growth potential is exciting, yet there are certain concerns regarding funding, which could bring about financial risks in the near future.

Due to recent acquisitions, Yamana Gold has incurred increasing levels of debt, reducing its financially strength. Nevertheless, revenue continues to soar due to increased production. Yamana is currently trading at 3.9 times its sales, resulting in a 65% price premium to the industry average. In accordance with the firm's great growth potential and the smart acquisitions it has made, I feel optimistic about this! stock.

A Low-Cost Producer

EIdorado Gold is a global mining company with assets in Turkey, China, Greece and Brazil. By producing over 650,000 ounces of gold in 2012, at a cash cost of $554 per ounce, the firm has achieved one of the lowest production costs amongst its industry peers. Due to low cash cost of its operations, and the long lifetime projected for its mines, Eldorado Gold has a narrow economic moat. Van Eck Associates Corporation seems to have recognized the firm's potential, as it recently purchased over 7 million shares.

Eldorado´s expansion plans for its flagship asset, Kisladag in western Turkey, will improve the mine's economics further, bringing its potential future production forward. Also, the Efemcukuru mine will be reaching full capacity over the next year and producing at even lower unit cash costs than Kisladag. In addition, Eldorado obtained further operations in Greece and Romania, through the acquisition of European Goldfields in 2012. These mines, along with the firm's assets in China, will be responsible for increasing gold output even further. However, certain geopolitical risks must also be factored into the equation. Dealing with the Chinese government is not always predictable. Furthermore, declining gold prices could seriously affect Eldorado's finances.

In spite of expansion projects and acquisitions, Eldorado has maintained its debt in check and continues to boost its revenue. The financially stable Eldorado is currently trading at 5.1 times its sales, entailing a whopping 112.5% price premium to the industry average. The Canadian gold producer is bound to have a great future, yet due to the high price premium I would hold on this stock for now.

It's All About the Long Term

Despite the troubles gold mining companies are facing, some firms have managed to bolster their income by producing at low costs and thus staying below current gold prices. Yamana and Eldorado are outperforming their industry peers, as their current p! rice tag ! suggests. Hedge funds such as Donald Smith & Co. and Van Eck Associates Corporation seem to have be on the same page, as they both decided the price premium was worth paying, due to the firms' growth potential.

Related links:Bridgewater Associates

Saturday, January 24, 2015

Securities America Boosts Advisor Recruiting

Securities America announced Tuesday that it had hired three regional directors to recruit what it said was a “continuously growing pipeline of prospective advisors” in those regions.

Marc Beekman, 33, is the new regional director for greater New England, including Washington, D.C.; Steve Dripchak, 52, a 30-year industry veteran, is a senior regional director focused on the Northeast, including New York and New Jersey; and Troy Reeder, 38, who has served in various wholesaler roles, will serve as the regional director for the Northwest, stationed in Denver.

“We are pleased to welcome three new recruiters with extensive securities industry experience to the Securities America team,” said John Behn, Securities America national director of branch office development. “All three are local to their sales territory, providing just-in-time personal access to prospective advisors, which will be key to the ongoing growth of the company.”

Beekman began his career as a financial advisor before becoming a wholesaler with Jackson National Life and then Transamerica. Most recently, he was a personal investment officer with BBVA Compass Bancshares.

Dripchak has held various senior sales and relationship positions including the role of vice president of relationship management at National Financial Services. Most recently, he was a vice president at COR Clearing.

Reeder began his career in the securities industry in 2004 as an internal wholesaler for Jackson National Life. He has been in various wholesaler roles representing top insurance carriers and their products for nearly eight years, most recently wholesaling mutual funds to independent advisors.

Raymond James announced July 17 that it had also hired new regional directors to help boost its advisor recruiting efforts.

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Check out Raymond James Taps Wirehouse Talent to Boost Recruiting Team on ThinkAdvisor.

Friday, January 23, 2015

Don't wait till 30; start investing now: Roongta Sec

Roongta said, "Since you have a longer time horizon, you can allocate more towards your high-risk, high-reward assets such as equities. As you grow older, the equities allocation will start reducing over a period of time."

Also Read: Investing for tax saving? Choose your options wisely

Below is the verbatim transcript of the interview

Q: A lot of people delay their investments in the hope that there is enough time or maybe they do not have sufficient surplus to invest early in their careers. How beneficial is it to begin investing early or can it be delayed by a few years?

A: To answer first question, let me use an example to explain how it is beneficial to start investing early. If you take a case of a 30-year-old person who sets aside Rs 1,000 a month, this is just for calculation purposes for a period of 30 years and has anticipated retirement age of 60 years. If you generate a long-term return of equity 14 percent annualized return, the corpus that this person will accumulate would be about 54 lakhs with Rs 1,000 over 30 year period. If he delays this by just five years, he says that I have enough time for retirement; I can probably start investing at 35. If he starts making the investment from 35 years of age, so he has another 25 years left, if he invests the same Rs 1,000, the corpus that he will accumulate will not be 54 lakhs but it would be about 26.5 lakhs.

So, it is about half of what he would have accumulated otherwise by just a five years period that he has delayed. That is the price that he would pay. Suppose, if he needs to accumulate the same amount of 54 lakhs by starting at 35, he has to now start investing Rs 2,000 a month for the next 25 years. This is the cost that you would pay to delay every year of your investment. So, there is a huge cost that you are paying not only in terms of losing time but even otherwise. There are other benefits too. If you start early, there are usually less liabilities in the early years. So, there is less burden on your finances if you are setting aside some money for investments.

Besides, since you have a longer time horizon, you can allocate more towards your high-risk, high-reward assets such as equities. As you grow older, the equities allocation will start reducing over a period of time. So, these are couple of benefits. What I would normally recommend or suggest is that why even wait for 30 years of age. If the first time you get your pay cheque, ideally an investor should start investing immediately, set aside a portion of it for his long-term requirement.

Q: How will you priorities? What if the investor wants to go for a house, would that be the priority and not think of putting some money aside for retirement?

A: Buying a house is a very tricky question. If you are buying a house early in your life for your self occupancy purposes then it maybe right to allocate all your investments for EMI purposes for your house purchase. But if the purpose of buying the house is again only for an investment purposes, then you need to stick to your asset allocation plan, which is that you need to have some bit on equities, into debt, you need to have precious metals into your portfolio and then real estate.

So, it depends on what is the purpose of buying the houses. If it's for self occupancy that you can allocate your entire fund for a moment and as your income increases going by you can start having equities and debt into your portfolio. But if it's for investments then it is better to stick to asset allocation plan.

Thursday, January 22, 2015

Intuitive Surgical Earnings: Down on da Vinci

Intuitive Surgical (NASDAQ: ISRG ) officially announced its second-quarter earnings results on Thursday after giving preliminary figures last week. The news isn't any better for the robotic surgical systems maker. Shares dropped 13% following the earnings announcement.

Unsurprising numbers
On July 8, Intuitive said that it expected to report quarterly revenue of around $575 million and earnings of around $160 million. The company mentioned that while sales of instruments and accessories increased by 18%, sales of its da Vinci surgical systems fell by 6%. Intuitive said that this drop stemmed from "increased economic pressure on hospitals" and to "moderating growth" in benign gynecologic procedures.

Thursday's announcement confirmed most of the earlier information. Revenue for the second quarter came in at $579 million, a little higher than the preliminary figure given but still well below initial expectations. The figures provided last week for increases in instruments and accessories sales and declining da Vinci surgical systems sales were on target.

Intuitive reported earnings of $159 million, or $3.90 per diluted share. That's a paltry 2.8% increase year over year in earnings, but the per-share figure reflects a higher 4% jump due to share repurchases by the company. The average analysts' estimate was $4.04 per share.

Doubling down
Although the revenue and earnings numbers weren't a surprise to anyone, Intuitive Surgical stock still fell nearly as much as it did following the sneak peek last week. Why another drop on results that everyone knew were coming?

The primary reason stems from Intuitive's guidance for the rest of the year. Previous guidance given by the company called for full-year da Vinci procedure growth of 20% to 23% The company now expects 15%-18% growth. Due largely to this slower growth, Intuitive projects full-year revenue will be flat to 7% higher than revenue for 2012.

Another factor is a warning letter that Intuitive received from the U.S. Food and Drug Administration on Wednesday. Earlier in the second quarter, the FDA conducted an on-site audit and issued four observations. At the time, Canaccord Genuity analyst Jason Mills talked with Intuitive management and said that the issues were "primarily administrative in nature" and that each issue was "thoroughly addressed."

Now, though, the FDA is asking Intuitive Surgical to take additional steps to address two of the four issues. CEO Gary Guthart says that the issues are addressable and that Intuitive is taking all necessary steps for resolution.

Looking ahead
Clearly, the environment that Intuitive Surgical faces today is quite different from what it has encountered over the past few years as it grew rapidly. A company that grew revenue at a 25% annual rate over the past five years is now projecting possibly flat growth?

The reality is that Intuitive Surgical isn't a growth stock any longer -- at least not for now. As such, it doesn't deserve growth stock price-to-earnings multiples. That's why shares have plummeted so much.

Management doesn't expect the situation to improve significantly this year. Unless something changes, though, shares aren't likely to move back up to any major extent.

Having said that, this is still a good company in my view. I think the value of its products will win out over the long run. Intuitive certainly has some public relations issues to address with the da Vinci systems, but I think that it will overcome those hurdles. The FDA issues will be resolved. Life will go on.

After the latest sell-off, shares are trading well below even the lowest price target of 13 different analysts polled by Thomson/First Call. Analysts can be wrong -- and often are. I don't think they're all misjudging Intuitive, though. My view is that Intuitive will find its way again, but I'm not sure how long it will take to do so.

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Barnes & Noble's Warning for Amazon.com

Barnes & Noble (NYSE: BKS ) couldn't quite make its tablet business work. The market proved too competitive, too expensive, and too risky. In the end, the retailer failed to sell enough Nooks to get to profitable scale, and to power those all-important content sales.

The Nook's digital business fell by 8.9%, thanks to lower device sales and a tough comparison with last year, when customers were snapping up popular titles like The Hunger Games.

Thanks, Kindle
A lot of those Nook tablet struggles came at the hands of Amazon.com (NASDAQ: AMZN ) , and the success it managed with its Kindle devices. The online retailer's tablet and e-reader lineup dominated its own sales lists, snatching the top four spots of its best-selling products worldwide last year. In fact, every one of Amazon's top 10 best-selling items last quarter were either digital or Kindle-related. That's what a strong ecosystem looks like.

Still, Amazon might soon be feeling the same content pinch that its bookselling rival has this year. In other words, Barnes & Noble's shrinking digital content revenue could be a sign of weaker sales growth ahead for Amazon.

It's true that the retailer is having no trouble moving its tablets and e-readers. But it is still seeing stalling growth from its media business, which includes e-books and other downloads. Last quarter -- when digital content sales should have been jolted by a rush of new device owners filling their tablets with digital stuff -- Amazon's media business chipped in just 12% of its total revenue growth. A year ago, that figure was a much stronger 22%.

Source: Amazon.com financial filings and author's calculations.

Most of that slowdown came from Amazon's international media business, which grew by just 1% last quarter. Media sales in the United States rose by a more respectable 14%, but that was still slower than the 17% growth Amazon booked in the year-ago quarter.

If consumers, particularly in the U.S, are scaling back on their digital content purchasing, then that poor sales growth trend will continue. Investors will find out if Amazon bucked the trend later this month when it reports its earnings results.

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Wednesday, January 21, 2015

Will Mattress Firm Deliver on Its Big Growth Plans?

Tomorrow, Mattress Firm (NASDAQ: MFRM ) will release its latest quarterly results. As the consumer segment of the economy has picked up steam over the past several years, discretionary spending on things like mattresses is finally starting to grow, and Mattress Firm has managed to capitalize on that trend.

Mattress Firm is one of the newer players in the publicly traded markets, having had its IPO in late 2011. Since then, though, it has made a strong impression, overcoming some big challenges to rise more than 50% from its opening-day IPO close. Let's take an early look at what's been happening with Mattress Firm over the past quarter and what we're likely to see in its quarterly report.

Stats on Mattress Firm

Analyst EPS Estimate	$0.36
Change From Year-Ago EPS	16%
Revenue Estimate	$274.39 million
Change From Year-Ago Revenue	31%
Earnings Beats in Past 4 Quarters	3

Source: Yahoo! Finance.

Will Mattress Firm's earnings let investors sleep well this quarter?
Wall Street's views on Mattress Firm's earnings have gotten a bit more pessimistic in recent months, as analysts have reduced April-quarter earnings estimates by $0.04 per share as well as cut a nickel from their earnings-per-share consensus for next fiscal year. The stock, however, hasn't hesitated in its strong upward move, rising more than 30% since late February.

Much of the gains that Mattress Firm's stock has enjoyed came after the company's previous quarterly report in late March. Even though it missed earnings estimates and saw its adjusted earnings per share fall by nearly half, favorable guidance for the full year helped earn upgrades from several analysts. With acquisitions of smaller companies, Mattress Firm has driven its revenue growth, even though same-store sales actually declined.

But Mattress Firm has to deal with competitors that are highly motivated to thwart its growth plans. On one hand, Tempur-Pedic's (NYSE: TPX ) now-completed acquisition of Sealy has broadened the former high-end mattress specialist's product line to cover more of the lower-end business that Mattress Firm has historically focused on. At the same time, Select Comfort (NASDAQ: SCSS ) has managed to take over its primary competitor in the air-filled mattress market, giving it sole control of that segment of the overall mattress market.

The big unresolved question for Mattress Firm is the extent to which the improving housing market will drive mattress sales. Traditionally, many homebuyers make purchases of big-ticket home-furnishings to go with their new homes, and as housing activity is on the rise, that should be a good sign for the industry. Yet if buyers are stretching their budgets on new homes, then less money could be left over for discretionary spending.

In Mattress Firm's report, watch for signs of how the company plans to tackle the new Tempur-Sealy matchup. With newly invigorated competition, Mattress Firm needs to step up its game to retain its fast-paced growth.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of the last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

Click here to add Mattress Firm to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Monday, January 19, 2015

A Radical Cure for the Ills of Payday Lending: Transparency

Getty Images There is no force greater than a reasonably free market economy, but it can only exist if: Companies compete for your business. In other words, there is more than one choice. (No monopolies allowed.) Consumers have the ability to compare, ditch and switch. They can, with a little effort, understand the true cost of competing products, make informed decisions, and change suppliers easily. Companies producing products that no one wants to buy can fail. They will go out of business, and the people who invested in the business will lose their investments. When consumers have choice and transparency, and when companies are never too big to fail, amazing things can happen. The market will be brutal to companies without a compelling product or value. And it will disproportionally reward those who create real value for consumers. Unfortunately, the forces of the market usually don't reach consumer financial products. But, when true markets are created, the results can be dramatic. Price Comparison Sites Work Amazingly Well in U.K. In the United Kingdom, price comparison websites have revolutionized financial services, particularly auto insurance. If you want to buy auto insurance, you can visit a website, enter a few pieces of personal information and immediately see real personalized quotes from most major auto insurance companies. These are not estimates based upon public records or reverse-engineered guesses based upon the clever work of a computer scientist. The auto insurance companies share their pricing information with the price comparison websites. Thus, all three conditions of the market are met. Consumers can go to one website and see the cost of the products being offered. It is very easy to compare, ditch and switch online. And no auto insurance company has a handout from the government. If they don't compete for business, they will fail. Most importantly, the price comparison websites show the cheapest products first, not the products that pay the highest commissions. To be the top recommendation, you have to be offering the best price. Auto Insurance Premiums Have Fallen 30 Percent -- Over There And the result? Since 2011, auto insurance premiums have dropped by more than 30 percent. In the last 12 months, auto insurance premiums dropped a staggering 19.3 percent. How can prices keep going down? The pressure of the market is forcing companies to innovate. They are improving their underwriting models. They are investing in better fraud detection and claims handling processes. But they are doing all of this to lower premiums so that they can stay alive, not because they plan on making more money. The market is forcing them to compete. And it is brutal. Compare the U.K. market to the U.S. auto insurance market, where insurance premiums are generally increasing. One website, www.leaky.com, tried to bring transparency to the auto insurance market. Not surprisingly, the auto insurance companies were not interested in transparency. In fact, the company received a cease-and-desist order every two months of its existence from insurance companies trying to stop it. Eventually, fighting the litigation became too much, and the startup had to shut down its product. Think about what that means to you: Big insurance companies sued a tiny company into oblivion solely because they don't want you to know how much their products cost. And the auto insurance companies are still fighting hard to ensure that it remains difficult for consumers to compare, ditch and switch. And Now Consider Payday Loans Thanks to true price comparison websites, the U.K. consumer has enjoyed ever-reducing insurance premiums, ever-increasing low-rate balance-transfer durations (you can now borrow at 0 percent for 34 months in the U.K.) and ever-lower personal loan interest rates (with excellent credit, it is easy to get a 5.1 percent interest rate). Regulators there have taken note and would like to unleash the power of the market on one of the worst corners of financial services: Payday loans. As the Guardian reported last week, the competition regulator is going to force payday lenders to share their pricing information with price comparison websites. Payday lenders offer short-term loans to consumers who have no other options. On average, payday lenders charge between $15 to $20 for every $100 that you borrow for 14 days. But the real money is made when borrowers roll over the loan. When the debt comes due in 14 days, the borrower has two choices. They can pay back the $100 borrowed or pay another $15 to $20 to extend the loan for another 14 days. According the Consumer Finance Protection Bureau, 80 percent of borrowers roll over their loans. Hidden fees can often add up to far more than amount of the loan. Short-term loans turn into long-term loans, loaded with fees, generating annual percentage rates in excess of 1,000 percent. Payday Lenders Scheme Around the Rules Attempts to regulate payday lending have been a complete failure, on both sides of the Atlantic. Payday lenders are clever and find ways of getting around every rule designed to hem them in. In fact, a number of U.S. payday lenders are incorporated on Indian reservations to avoid regulatory oversight completely. The payday loan model remains: Hide the true cost of borrowing. Don't share pricing up-front, making it difficult to compare. Keep people in debt forever, by making it "cheaper" to extend, rather than pay off the loan. But rather than trying to write new rules, which payday lenders will find their way around, we should consider unleashing the power of the market. Imagine if payday lenders had to share all of their pricing model with price comparison websites. Consumers who need cash could go to a single website and see how much it would actually cost to borrow the money until the loan is completely paid off. Remember the most important part of a price comparison website: the person with the lowest price almost always wins. Financial services are a commodity. So, if payday lender A has a 1,000 percent APR, and lender B has a 990 percent APR, then all of the business would shift to lender B. Lender A would see a dramatic drop in business, and would have to respond. Payday lenders could drop their prices by 90 percent and still make great profits. But they don't drop their prices because they don't have to. Forcing transparency on the payday lending market could drive real change. Consumers Would Benefit on Other Products The ability of the price comparison business model to transform financial services inspired me to leave the U.K. and move back to the U.S., where I created MagnifyMoney.com. I believe that complete price transparency quickly rewards companies with the best product, rather than the biggest marketing budget. For example, we have a balance transfer marketplace where PenFed (a credit union that anyone can join) usually takes the top spot. It is there because it has the best product (you can move your debt from other credit cards to PenFed and pay only 4.99 percent for 48 months, with no fee), not because it has the biggest marketing budget. When banks that are too big to fail aren't forced to compete based upon price, consumers lose. We have a lot to learn from the dominance of easy-to-use price comparison websites in the U.K., and I look forward to the day when banks, payday lenders and insurers are racing to drop prices in an effort to survive.

Managed to get that raise or promotion? Fantastic -- now don't go out there and spend it all immediately. In classic "keeping up with the Joneses" fashion, too many of us see an increase in salary or a sudden windfall (like an inheritance) as an excuse to take our lifestyle up a notch. We buy bigger houses than we need, get the latest gadgets even though ours work just fine,and spring for fancy steak dinners just because we can.

Consumer Confidence Slides in September

Katie Alaimo/Kalamazoo Gazette-MLive Media Group via AP WASHINGTON -- U.S. consumer confidence dropped in September after hitting the highest level in nearly seven years in August. The Conference Board reported Tuesday that its confidence index fell to 86, the lowest point since a May reading of 82.2. It was the first decline after four months of gains and followed a revised 93.4 in August, which had been the highest reading since October 2007, two months before the Great Recession officially began. Conference Board economist Lynn Franco said the decline reflected a less bullish view of the current job market, likely reflecting a softening in growth following the economic rebound that occurred in the spring. Both the gauge that tracks consumers' feelings about current conditions and the reading of future expectations fell in September. "Consumers were less confident about the short-term outlook for the economy and labor market and somewhat mixed regarding their future earnings potential," Franco said. The September decline stood in contrast to a separate consumer sentiment survey released last week by the University of Michigan. Its index climbed in September to the highest level since July 2013. The fall in the Conference Board gauge of confidence was the biggest monthly drop since October 2013 when consumers were rattled by the 16-day partial federal government shutdown. Paul Dales, senior U.S. economist at Capital Economics, said that the decline was likely just a temporary blip. "With gasoline prices falling and the labor market still strengthening, we expect confidence will edge back before long," Dales said.

Saturday, January 17, 2015

This Equipment Giant Is on the Road to Recovery

The global farming sector is declining and it is putting pressure on companies in this industry. One such farm equipment giant, Deere (DE), recently released its results for the third quarter which were not up to the mark. But still, on some grounds and as compared to peers, the company did pretty well with decent results. The financials were weak on the back of poor demand and difficult conditions in the global farm sector. However, Deere thinks that it is doing well and will be able to post better results in the future as it is seeing higher shipment volumes.

In the recently reported quarter, Deere's revenue declined by 5% to $9.5 billion as compared to $10.01 billion in the same quarter a year earlier. On the earnings part, the company posted EPS of $2.33, which is a 15% drop as compared to $2.56 per share that it posted last year in the same quarter. The revenue and the earnings of the company declined, but it didn't surprise the analysts much as this drop came in line with what the consensus was modeling.

Trying for a recovery

Deere is suffering. The world's largest farm machinery seller took a hit mainly because of two reasons – first, because of the declining farming sector and second, because of the unfavorable weather conditions for agriculture that are putting pressure on Deere's business. However, Deere is taking various initiatives that are aimed at driving its profitability.

Deere is seeing better prospects due to the recovering economy in Europe. Since the economy is growing, the exports will improve. This will be an advantage for consumers as well as business owners such as Deere. In addition, the GDP across Europe is expected to accelerate slightly in fiscal 2015, which makes Deere's long term prospects strong.

Better demand

Moving forward, Deere is seeing that demand for various crops is increasing. For example, it expects that in the coming days, the demand for soybean and grain will improve. Further, the livestock is also expected to touch new heights in 2014, giving ample opportunities to Deere to increase business. Lastly, Deere expects that demand for grain will remain strong globally, helping Deere's farming equipment grow going forward.

Deere also has other strategies for clearing its inventory such as a John Deere Certified Pre-Owned Program. This program will help the company in selling out its equipment effectively to farmers around the world.

Moreover, the company is executing various initiatives for large late model tractors across the United States and Canada. For example, free warranty coverage is one such move. This initiative will raise the sales for used tractors. The company, on the other hand, is also planning to lay off approximately 600 factory employees to lower costs.

Moving on to its construction and forestry segment, the company is seeing good traction in the market as it is seeing growth in volumes and price realization. As the housing segment is growing, it is making the construction segment better by ramping up production in housing and building development. In addition, Deere is also seeing good support from the energy sector, which can prove to be a growth driver for it in the future.

Conclusion

With a trailing P/E of just 9.16, Deere looks really cheap. Since its initiatives are gaining strength

Thursday, January 15, 2015

Here's Why Investors Should Bet on Diamond Foods for the Long Run

Diamond Foods (DMND) is going through a nightmare in 2014 as it suffers from a torrid past. In 2011, there was an accounting scandal at Diamond Foods, resulting in losing the acquisition of Pringles to Kellogg. Pringles formerly belonged to Procter & Gamble, and its addition to Diamond's fleet could have helped it increase its product line up. But with that opportunity gone, and along with tough competition from peers such as ConAgra, Diamond Foods is having a tough time.

But management has not lost hope, and is still optimistic about its prospects. It agreed to pay $5 million to settle SEC charges for cooking the books and it can now focus on growing the business. This news received a favorable response from the market. But the biggest question on investors' mind is whether it will continue with this momentum or not.

The road ahead

Management is working hard to recover from the after effects of that scandal. During the first quarter of 2014, the company managed to continue at the same pace as before. The company undertook a combination of strategies, which include net price realization, cost reductions, and productivity improvements. As a result of this, its gross margins expanded 24.7% to 200 basis points.

However, its net sales for the quarter declined 17.1% from the year ago period, mainly on account of a shortfall in supply. But it was partly offset by a 1.2% increase in its snacks business on a year over year basis. Consequently, its net revenue declined 9.2% to $234.7 million as compared to last year. Also, its diluted earnings per share were $0.18 as compared to $0.24 a share last year.

Strategies to drive growth

In order to further prevent these declining numbers, Diamond has adopted a cost cutting strategy. Under this, the company plans to save around $35 million to $40 million in fiscal 2013 and 2014, which will be primarily from procurement and manufacturing productivity. Consequently, management expects that this will generate an earnings growth on a year over year basis in fiscal 2014.

Moving forward, it aims to generate top line growth from fiscal 2015 onwards. According to data provided by Bloomberg, Diamond Foods has cut the rate on a $415 million loan it's seeking to refinance debt. This will further help the company to increase its earnings in the days ahead.

Competition

But, Diamond has to face tough competition from Kellogg. Kellogg is currently experiencing weakness in its cereal business in the developed markets, as customers are moving to a healthier lifestyle such as natural and organic food items. Consequently, its revenue for the quarter declined 1.7% from a year ago period.

However, Kellogg is determined to win back its customers, and as a result it has introduced innovative products that would be according to the requirement of its consumers. It has introduced a series of new products such as new Special K Chocolate Almond, the Krave cereal, Touch of Fruit Mini-Wheats, Bear Naked granola, and new Kashi cereals. It also includes three varieties of Organic Promise, all of which are GMO-free.

Moreover, Kellogg is also focusing to decrease its cost structure through a $1.2 billion-$1.4 billion 'Project K' restructuring program. Management expects that this will help the company save around $425 million-$475 million by 2018. This will further boost its growth in the next four years.

Conclusion

Diamond Foods, however, has put in a lot of effort and its hard work is starting to pay off as the market has duly rewarded its efforts. It still continues with its growth strategies and as the company leaves behind the SEC charges settlement case, investors can expect it to rally. Investors who currently own the stock should probably hold it further as it can yield handsome returns in the future.

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Car deals abound on big holiday sales weekend

This is a great weekend to be a car dealer.

Strong Memorial Day sales are expected at dealers across the country, a reflection of a stronger economy and pent-up demand from a dreadful winter when consumers put off buying new cars until the snow finally melted.

So what are the best deals?

If cash back is your goal, look at the Chrysler 300, with $3,250 off its list price of $31,890; Ford Expedition with $5,000 off its $43,170 list and Fiat 500 with $2,000 off its $18,300 list, according to Kelley Blue Book.

If you plan to lease, KBB says take a look at the Nissan Altima or Ford Flex at $189 a month; Ram 1500 Quad Cab at $229 a month or Infiniti Q60 at $299 a month.

New-car sales this month are expected to come in at 1.3 million this month, up 4% from a year ago, according to J.D. Power and LMC Automotive. Dealers are helped by a quirk in the calendar: this May has five weekends, instead of the usual four.

J.D. Power estimates that consumers will spend more than $37 billion on new cars this month. That would beat the previous May high of $34.3 billion set in 2004. Power says May is the eighth consecutive month that consumer spending on new vehicles has increased compared to last year.

One reason: Consumers want more options and are spending more on the cars they buy. Power expects them to pay an average of $29,600 for a new vehicle, up about $800 from last year.

Bank of Japan chief signals impatience with Abe

Bloomberg Haruhiko Kuroda

TOKYO -- Japan's central-bank chief predicted victory in his battle to root out the deflation that has long sapped economic vitality in the world's third-largest economy, but expressed impatience with the government's pace in cutting red tape and encouraging businesses to invest more.

"Implementation is key, and implementation should be swift," Bank of Japan Gov. Haruhiko Kuroda said in an interview with The Wall Street Journal. "The major work to be done is by the government and the private sector."

Kuroda's comments mark an important shift in tone more than a year after he was tapped by Japanese Prime Minister Shinzo Abe to engineer a newly aggressive monetary policy. The resulting "bazooka" of stimulus actions, including the purchase of trillions of yen in government bonds and other assets, has fueled Japan's longest economic growth streak in nearly four years and a steady stream of positive inflation readings.

Despite signs of progress, Kuroda warned in the interview that the longer-term triumph could be relatively hollow if Abe doesn't step up his campaign for deeper, structural changes that go far beyond monetary policy. Unless the Abe administration follows through soon, "the real growth rate may be disappointing," Kuroda said. "That is not good for the economy, not good for the society."

In response to the prod for more action, Abe said in a separate interview with the Journal that he already has moved aggressively to shake up entrenched sectors of Japan. Additional proposals will be unveiled in late June.

"We have implemented complete liberalization of the retail electricity market" and scrapped a 40-year-old subsidy to cut rice planting, Abe said. "Many of these were areas where reform was believed not possible, but we've made them happen."

Abe added: "Structural reforms are a never-ending theme for the Abe administration."

Kuroda also signaled concern that a sustained rise in the value of the yen could undermine gains already made. While previous Bank of Japan governors have traditionally avoided openly discussing exchange rates, Kuroda in the interview said investors shouldn't expect the yen to rise further, even as it flirts with its highest levels in months. "I don't think it's reasonable to expect the yen to appreciate against the dollar," Kuroda said.

Kuroda's comments were a strong sign that he plans to tackle broader issues that traditionally haven't been part of the Bank of Japan's turf, even if that means taking a more aggressive tone than Abe. The prime minister put Kuroda, a financial-policy veteran and longtime critic of the central bank, in charge of the Bank of Japan in March 2013.

Read the full article at WSJ.com.

Tuesday, January 13, 2015

Is Buffett's Graham Holdings Deal a Glimpse into Berkshire's Future?

Updated from 10:50 a.m. ET to include closing share prices and calculations of Graham Holdings exchange

NEW YORK (TheStreet) -- Warren Buffett may be perfecting a new way for Berkshire Hathaway to exit its large investments. On Wednesday, Berkshire Hathaway (BRK.A) and Graham Holdings (GHC) agreed to a deal where the Warren Buffett-run company will acquire Miami TV station WPLG, cash and Graham Holdings shares in Berkshire Hathaway in exchange for Berkshire's 1.6 million share stake in the former owner of the Washington Post.

Berkshire Hathaway's deal essentially cashes out the investing conglomerate from its long-standing investment in Graham Holdings. But Berkshire won't sell a single share in the deal, even as it forks over about 21% of graham Holdings' stock.

Instead of selling shares on the open market, Berkshire will give its 1.6 million shares back to Graham for a TV station, cash and Berkshire shares that Graham Holdings acquired during a long-relationship between Buffett and the newspaper's founding family.

The Miami TV station will be valued at $364 million, and Graham Holdings will fork over $327.7 million and $400.3 million worth of Berkshire shares, as part of the deal, according to an 8-K filing with the Securities and Exchange Commission. Berkshire Hathaway will retain between 91,490 and 111,716 shares in Graham Holdings depending on the trading prices of both firms as the exchange closes.

For Berkshire Hathaway, the deal is more of an estate sale than anything. Buffett held onto a large chunk of Graham Holdings shares for decades amid the chronic decline in the newspaper industry, partly out of a relationship he had with the Graham family and particularly Katherine Graham. "I can afford to be sentimental," Buffett said of Berkshire's investment in Graham Holdings.

That sentiment, however, may have been lost when Graham Holdings sold The Washington Post to Amazon (AMZN) founder Jeff Bezos in 2013. What remains of Graham Holdings, formerly known as The Washington Post Company, is a conglomeration of educational businesses and broadcast TV channels.

If history is any guide, there may be tax savings in Buffett's share swap deal with Graham Holdings, over a sale of the company's stock.

For Graham Holdings, Monday's deal mostly amounts to a large stock buyback. Instead of Berkshire selling those shares on the open market, Graham will transfer assets such as WPLG, cash and Berkshire shares to Buffett.

Essentially Berkshire and Graham Holdings agreed to a swap, and not a sale.

Two things stand out. First, Buffett has now officially exited Berkshire's biggest newspaper investment, a stake often criticized by outside observers. There are few stock market "Oracles" still invested heavily in newspapers.

More importantly, however, Buffett's swap deal may be indicative of how Berkshire Hathaway could increasingly look to exit large investments.

Because Berkshire has so many large investments with unrealized gains, both Buffett and the company he invests in are in a slight bind if Berkshire wants to exit an investment. Large sellers of shares sometimes cause a company's stock to fall. There are also tax implications for Buffett.

Exchanges of company assets appear be an alternative way for Berkshire to exit its investments.

In December, Berkshire Hathaway exited its stake in Phillips 66 (PSX) by agreeing to a deal with the company for its Phillips Specialty Products unit, which optimizes the flow of oil and gas through pipelines. The deal may have underscored Buffett's willingness to invest in the logistics surrounding a surge in onshore oil and gas transport across the U.S.

It also amounted to a cash-rich spin-off for Phillips 66 and Berkshire Hathaway, according to Robert Willens, a tax expert.

Willens noted that the Phillips 66 deal was similar to Berkshire's divestment of White Mountains Insurance Group (WTM). In 2008, Berkshire divested an over 16% stake in White Mounts directly to the company in exchange for $751 million in cash plus two units of the Hamilton, Bermuda-based insurer.

Berkshire's Graham deal is similar to its White Mountain and Phillips 66 stake sales.

Whether Buffett's deal-making ways extend to Berkshire's larger investments like Wells Fargo (WFC), American Express (AXP), Coca-Cola (KO) and IBM (IBM) could be a story to watch in coming years.

"I am sure this is a mutually beneficial transaction for both companies," Buffett said of his Graham Holdings deal on Monday. "While this transaction will greatly reduce our position in Graham Holdings, our admiration for the company and its management is undiminished."

"Warren Buffett's 40-year association with our company has been extremely good for our shareholders. Naturally, the deal that we have put together is one that will be good for both companies," said Donald E. Graham, chairman and chief executive officer of Graham Holdings Company, said on Wednesday.

Graham Holdings gained over 3% in Wednesday trading, closing at $730.79. Berkshire Hathaway shares closed up less than 0.5% at $187,750. -- Written by Antoine Gara

Stock quotes in this article: BRK.B, GHC

Monday, January 12, 2015

Our Outlook For Stocks in 2014

Related SPY Did The VIX Have It Right On Thursday? Top Trending Tickers On StockTwits For January 31

The bull market received a bit of a scare last week as the S&P 500 fell almost 3%, the biggest single week loss since 2012. The market seems to have recovered this week, but a repeat of the 26% gain in 2013 doesn’t appear to be in the cards.

Long-Term Bullish

Last May I wrote that I’m long-term bullish and I don’t believe the stock market is in a bubble. I continue to stand by that thesis. The market has withstood the beginning of the Fed taper without suffering the massive decline that many predicted.

The article I linked to above contains the details of my outlook on the economy as a whole, so I won’t go into too much detail here. Basically, I believe the U.S. economy is undergoing a restructuring where we are becoming radically more productive. Businesses are allocating capital more efficiently; the labor force is retooling its skills for the new economy; and technological innovation continues to push the limits of human productivity. The implications of this advancement can be seen in Figure 1.

Figure 1: A New Paradigm for Capital Allocation and Economic Growth.

New_Economy_NewConstructs Source: New Constructs, LLC.

The average return on invested capital (ROIC) of 20% for the S&P 500 (NYSE: SPY) and the increasing economic earnings of S&P 500 companies supports this thesis. The slow growth in GDP over the past few years is a sign that companies are becoming more deliberate and careful in their capital allocation.

Valuations Raise Short-Term Concerns

Despite my bullish outlook on the economy as a whole, it’s impossible to ignore the fact that valuations are getting a little stretched. In the past few months, the price to economic book value (zero-growth value) ratio of SPY reached 2.6, which is what we consider to be a Dangerous level. Overall we still rate SPY as Neutral.

The high valuation of the S&P 500 shouldn’t send investors running for the hills, but I do expect that the market will be more turbulent this year as we see corrections in individual stocks and groups of stocks that have gotten especially overvalued.

Even though the market is richly valued, there are still plenty of good stock picks out there. Currently, 282 out of the 2,645 stocks we have under coverage (11%) earn an Attractive-or-better rating. 1,697 (64%) earn a Dangerous-or-worse rating. Figure 2 shows the rating landscape for stocks under our coverage.

Figure 2: Ratings for Stocks We Cover

Stock_Ratings_NewConstructs Source: New Constructs, LLC.

As you can see from Figure 2, our ratings currently favor large cap stocks over small caps. Even though Very Dangerous stocks outnumber Very Attractive stocks by almost three to one, Very Attractive stocks have the greater combined market value. Attractive-or-better rated stocks make up only 11% of the stocks we cover but they account for 18% of the market value.

Over the past five years, small caps have handily outperformed large caps. The Russell 2000 (NYSE: IWM) rose by 153% since 2009 compared to 115% for the S&P 500. However, we believe the disparity in their performances signifies that small caps are now overvalued. The Russell 2000 currently has a price to economic book value ratio of 5.1, nearly double that of the S&P 500. There are still quality small-caps out there, but on average small caps are overvalued compared to large and mid cap stocks.

A Stock Pickers Market

I expect to see some corrections in the market this year as valuations fall more in line with fundamentals. I don’t think the market is overvalued enough to cause a large-scale crash, so the corrections should be mostly contained to individual stocks. Even as the market struggles in the short-term, money can be made by those capable of identifying undervalued and avoiding overvalued stocks.

AutoZone (NYSE: AZO) is one of the stocks that earn my Very Attractive rating. AZO has grown after-tax profit (NOPAT) by 8% compounded annually over the past decade. Going with my theme of increasingly intelligent capital allocation, AZO has also increased its ROIC from 20% to 25% over the past five years. At its current valuation of ~$500/share, AZO stands out with a price to economic book value ratio of only 1, which implies that the company will never grow NOPAT from its current level. Given AZO’s strong track record of profitability and growth, I believe the market is significantly undervaluing this company. I expect strong short-term and long-term performance from AZO.

As I said before, I remain long-term bullish on the market as a whole. However, many stocks out there need time to grow into their valuations. We should see many corrections and modest performance from the market as a whole this year, but that does not mean your portfolio can’t achieve significant returns.

The Big Picture and Fed Policy

While valuations are stretched and investors must operate with a higher level of diligence in today’s markets, I believe stabilization of the housing market supports the underlying health of the economy and consumer balance sheets.

Ever since the financial crisis, the Federal Reserve policy has unequivocally supported the capital markets. They needed to support these markets to offset the decline in the nation’s largest asset: housing. Now, that housing has stabilized and consumers are able to catch financial breath, Fed policy can get back to the business of ensuring capital is allocated intelligently. Keeping interest rates too low for too long undermines the long-term economic growth potential of our economy.

So, we can expect the Fed to continue to taper bond purchases and raise rates back to more normal levels in the foreseeable future. These changes will challenge the stock market and lead to a greater rationalization of stock valuations. Momentum strategies will no longer be effective. Cash will again be king as the market will more narrowly focus on awarding value only to the stocks that can generate cash flows in excess of what their current stock valuation implies.

Making money picking stocks is about understanding true cash flowsand identifying disconnects between the market’s expectations for future cash flows and your own expectations. Anything else is gambling, not investing.

Sam McBride contributed to this report

Disclosure: David Trainer owns AZO. David Trainer and Sam McBride receive no compensation to write about any specific stock, sector, or theme.

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

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One on one with Wells Fargo CEO John Stumpf

2014 started off better than the year before for the major banks, with Wells Fargo claiming the top spot in terms of profit, overtaking rival J.P. Morgan as the most profitable bank for 2013. Even though the mortgage business has slowed as interest rates rise, refinancing, capital markets and a better economy are all contributing to a stronger environment for the year. Wells Fargo creates about a third of all mortgages in the country, so I caught up with CEO John Stumpf to find out what higher interest rates, changes at the Federal Reserve and more regulation will mean for 2014. My interview follows, edited for clarity and length.

Q: Characterize what you saw in the final quarter of the year and what you're expecting from the business climate in coming months.

A: The quarter was very strong. We had strong loan growth and deposit growth, which are fundamental parts of the business. A lot of people focus in the mortgage business, but if you look year-over-year, about two thirds of our originations were refinances, and about a third were purchases. In the quarter, just the reverse happened. About two thirds of originations were purchases and a third were refinancing. As loan prices go up, refinancing ebbs, which is not a bad thing. It means that housing is getting better. Another thing that showed up in our numbers in the fourth quarter was the best credit we have seen in this company in my 32 years here.

Q: Does this tell us that the consumer is healthier? Or are we talking the business environment?

A: This is the $64 question. Where is the consumer? It's not perfect, but compared to the last five Januaries, this is the best I've seen. Washington, D.C., seems to be working better together. There is a budget passed. We're not talking about fiscal cliffs and the debt ceilings and so forth. Unemployment is under 7%. Gas prices are down. Housing values are up. These are all positive signs. Business balance sheets are in the best shape I've ever seen, and consumers have p! aid down debt. As far as interest rates, people have reset their mortgages so that the "interest carry," the debt they carry, is back to something that was like it was in the '80s. Where is the consumer? It depends a lot on confidence. We are a retail spending-driven economy.

Q: Interest rates have moved up, as you noted. Are you expecting this to continue, and how will that affect this better environment?

A: We have to look at short-term as well as long-term rates. I see movement in the long end before I see it on the short end, although I'm not expecting big changes this year. There is talk about "taper" (the Fed pulling back on its buying of bonds). But remember, taper means buying less, and there's also less product available. When you have fewer mortgages being made, there is less product on the market. That will need to work through.

Ultimately, we need the Fed to get away from this exceptionally active involvement they have been in with monetary stimulus because it's not natural this late in the cycle. I don't know that that helps too many people that much. (With such low rates), I worry about the people who are retired who are earning less on their deposits and their investments than they planned. But still I don't think we will see big rate moves this year even though It will be in that direction.

Q: What kind of a 2014 are you looking for?

A: I think you are going to see increases in the value of homes by between 3% and 5% year over year. I think we will see a mortgage market that is largely dominated by purchase money. It would not surprise me if we were in a $1 trillion- to $2 trillion-mortgage marketplace. I think we will see continued job creation, albeit not as strong as we would like to see. Gas prices, it would not surprise me to see them moderate or stay where they are right now. I think we will see a little better economy than 2013. I'm optimistic. But I don't think it's gonna be a breakout year. I don't think we're at that point yet.

Q! : What ab! out the regulatory environment? This was top of mind last year. Are we seeing the rule-making get tougher and more expensive, and will it still top the agenda?

A: I don't think it will be as much as it was last year. We're starting to get a lot more clarity about what the rules are. Clearly, there is a review going on, and there's a lawsuit between the merchants and the Fed regarding where they came out on debit interchange fees. But I can tell you on that issue alone, with what happened recently, the breaches in big merchants, you can sure tell that this is not a risk-free environment. The banks need returns so we can invest in technology and safety (of customers data) because frankly, we have some old technology in that industry, and we are behind where other countries are. That will be dealt with between the Fed and the merchants.

I think there is more regulatory certainty today than there was in the last five years. On top of that, at least in our company, we have gotten a lot of litigation done and have dealt with the issues. We settled our Fannie Mae and Freddie Mac issues last quarter, so we are on our front foot here, looking to do things that are real business- and economy-type moves.

Q: In terms of getting back to regular business, are you expecting to increase your dividend this year? How will you allocate capital to shareholders?

A: This is an important question. This is the time of the year we submit our capital plans to the Fed and wait to hear back in early March where we come out. Last year, we paid out either through dividends or stock repurchases $11.4 billion, which is a lot of money. This year, we have asked to pay out more. It's really great to be able to reward stockholders. We've talked about a 50% to 65% payout because we have built up so much capital, and our liquidity is in such a great spot. We are excited to hear from the Fed and hopefully, will be able to do that.

Q: In terms of allocating capital toward technology improvements, what are y! ou expect! ing? What should consumers who are worried about those account data breaches do? How can people protect themselves?

A: We don't publicly state our total capital expenditures budget. But I can tell you that technology does dominate that spending, and this is a great example of why we are making this investment. From cybersecurity and from the consumer's perspective, as in the Target case, the consumer must be kept from harm. We are offering credit monitoring. If someone uses their card, debit or credit, and it is compromised in some way, we stand behind them. That's a great benefit and a great value. But you're right, we are making lots of investments in that area, and that will continue.

Q: What about the talk of splitting up the banks? Do you expect this to get more traction?

A: It goes up and down. It manifests itself in different ways. I wrote an article for the American Banker not long ago to say that all banks, small, medium and big, are important to the ecosystem of America. When I got in the industry, in 1975, we had 14,500 banks. Today, we have 7,000, and every one of those, I want to advocate for.

My little home town of Pierz, Minn., is a one-bank town. If that bank went away, that town would roll up and blow away. They are all important. America has been good to us, and we try to be good citizens for America. We serve large customers, small customers. We are one of the largest taxpayers in the country. It's important we do our share in philanthropy.

That being said, no bank and no company in any industry should be too big to fail. The fact is, when you look at Wells Fargo, we are not even one of the 20 top banks in the world. We are No. 4 in the United States. But our size is less than 10% of the GDP in the United States. This is small relative to the rest of the world, where some banks are over 100% of their GDP.

Q: Where is the biggest growth engine for Wells Fargo this year?

A: All of our businesses have an opportunity to grow but may! be the bi! ggest would be in the area of wealth-managed brokerage and retirement. We serve one in three Americans, one way or another. We have about 10% of the deposits in the country, but we don't have that same share of wealth. Many of our customers who call us their bank, keep their wealth somewhere else. That is a huge opportunity for us. I like the insurance distribution business, and I like some of the business we are doing in capital markets. I think the credit card business is also an opportunity for growth. Only 37% of our customers carry our credit card.

Q: I'm glad you mentioned retirement. Most people are not prepared for it financially.

A: You are absolutely right. I think the saddest situation I see is a 60-year-old person or family or couple that looks at their situation and says, "Uh, oh. I don't have enough to retire, and there's not enough years to earn that." The sooner people can do that, sit down, have some rudimentary financial plan — "What do I need to do today to retire when I am 65" or whatever age they think about — they will be less reliant on government. This is not just for the wealthy. This is for the mass market to get in front of before it's too late.

USA TODAY contributor and CNBC host Maria Bartiromo.(Photo: Todd Plitt, USA TODAY)

Saturday, January 10, 2015

3 Resolutions You Can Actually Accomplish in 2015

Just under half of Americans make new year's resolutions each year, according to a poll by Marist. Unfortunately, sticking to your resolutions can be difficult, especially as life seems to get busier and more complex every year. Furthermore, resolutions like eating healthy and exercising are important, but they're also some of the hardest to commit to, as they require something from you every day.

The good news? You can take steps to make your resolutions more attainable. Here are three resolutions many people have made for 2015, along with some ideas on how you can achieve them.

1. Save more money

Image source: Ken Teegardin via Flickr

Much like diet and exercise, cutting your spending and saving what's left takes discipline. So instead of summoning the willpower to cut spending and save more on a daily basis, make your saving automatic so you don't have to think about it.

Here are two ways to make saving a lot easier and less stressful:

Set up automatic transfers from your checking account to savings, or have part of your pay direct-deposited to savings. Increase your automatic contribution to your retirement plan at work. If you don't participate, start contributing immediately.

The resolutions that are most likely to fail are the ones that require frequent action on our part. By automating your saving, you remove the biggest barriers to success: thought and effort. Not only will your savings rapidly accelerate, but you'll have less disposable income to spend, as the money will get moved to savings or a retirement account before you have a chance to spend it. You'll be surprised at how quickly you'll adjust your spending habits as a result.

Afraid you'll dip into the savings to splurge? Make it harder to get to. Open a savings account at an online bank, don't install the bank app on your smartphone, and cut up the ATM card. Make it harder to access the money, and you'll be less likely to raid your savings.

Bonus tip: If you increase your 401(k) contributions at work, your savings will go even further: You'll cut your income tax bill, as contributions are made pre-tax, and if your employer matches your contributions (as most do), you'll end up with a much bigger retirement account.

2. Be a better provider

Taking steps to provide for your family can take weight off your shoulders. Source: Flickr user Aaron Logan.

Resolving to be a better spouse or parent is admirable, but it's pointless without specific guidelines. Instead of trying to be better, try to change or eliminate the things in your life that make you worse. Considering that financial concerns are one of the biggest sources of stress for most people, removing or reducing stress tied to finances is a good place to start.

If you're the primary earner in your household and you don't have a substantial nest egg, then having life insurance to provide lost income in the case of your death is a good idea. Only half of Americans have life insurance, and those who do are only covered for about three years' worth of income on average.

Furthermore, Accuquote's Byron Udell points out that 70% of people will need long-term care at some point in their lives, and the cost of that care will only increase over time. Acting today to prepare for an inevitable cost burden with a long-term care policy will not only protect your nest egg down the road, but it will also provide peace of mind for those you care about.

Making sure your family's financial future is protected can help ease your worries about the future, and that can go a long way toward improving your outlook and helping you be the kind of person you aspire to be.

3. Improve your health
Have you ever gone to a gym in January and then seen the same gym in February? It's amazing how quickly the crowd thins out -- and it's sad how quickly we give up on trying to live healthier lives. Fear of being unhealthy might get you going, but it probably won't help you stick to long-term goals.

For many, fear of failure can actually have the opposite effect, keeping you out of the gym entirely.

Incentives and things that we enjoy, on the other hand, tend to motivate us much better. In other words, if you don't like going to the gym, find a healthy activity you enjoy and reward yourself for reaching short-term activity goals.

With this in mind, many companies now offer benefits programs that give employees incentives to be more active, like programs to reduce insurance premiums for workers who reach certain activity levels. Qualifying activities can include things like participation in a local sports league and physical activities like hiking and walking. If your employer offers a benefit like this, find things you enjoy that will also earn you some activity credit, and start building healthy habits around physical activities you enjoy. Not only will you get healthier, but you'll save a little money, too.

You should also set short-term goals and reward yourself for reaching them. Instead of simply resolving to lose weight, plan to complete a minimum amount of activity. For example, walking six miles every week for the first three months of the year could mean you get to buy a new toy you've been wanting. Crank it up to 10 miles per week for the next few months, and you can reward yourself with something even better.

When it comes to being healthier, the more things we have to motivate us, the more likely we are to try. Setting specific, achievable goals with tangible rewards, be they monetary or otherwise, can help us keep going. Before you know it, you'll turn that trip to the gym or that early-morning walk into a habit.

Focus on the process, not the goals
One of the biggest reasons people fail at resolutions is that they fail to go beyond setting a goal. The Motley Fool's Morgan Housel said it best last April: "What you want is a system that allows you to be happy and successful, rather than goals that guide your system." He was writing about investing, but it applies to every aspect of our lives.

Don't get too caught up in trying to reach the goals -- you'll probably end up discouraged. Instead, think about the things you can control -- or better yet, make those changes automatic -- you'll be much more likely to do the things you resolved to do. Most importantly, you'll make healthy and happy changes that can last a lifetime.

How one Seattle couple secured a $60,000 Social Security bonus -- and how you can, too
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